Diageo to pay $16m in "illicit payments" case

28 July, 2011

US: The Securities and Exchange Commission (SEC) has found Diageo to have made “hundreds of illicit payments” to foreign government officials in India, Thailand and South Korea.

The SEC said Diageo paid more than $2.7 million through its subsidiaries to obtain “lucrative sales and tax benefits relating to its Johnnie Walker and Windsor Scotch whiskeys, among other brands”. Diageo has agreed to pay more than $16 million to settle the SEC’s charges. The company also agreed to “cease and desist” from further violations, though it neither admitted nor denied the findings.

Scott W. Friestad, associate director of the SEC’s Division of Enforcement said: “For years, Diageo’s subsidiaries made hundreds of illicit payments to foreign government officials.

“As a result of Diageo’s lax oversight and deficient controls, the subsidiaries routinely used third parties, inflated invoices, and other deceptive devices to disguise the true nature of the payments.”

According to the SEC, the company made more than $1.7 million in illicit payments to hundreds of government officials in India from 2003 to mid-2009.

The SEC found that from 2004 to mid-2008, Diageo paid approximately $12,000 per month – totaling nearly $600,000 – to retain the consulting services of a Thai government and political party official.

According to the SEC’s order, Diageo paid 100 million in Korean currency (more than $86,000 in U.S. dollars) to a customs official in South Korea.

The statement also said that Diageo “improperly paid travel and entertainment expenses for South Korean customs and other government officials involved in these tax negotiations”.

The SEC’s order found that Diageo and its subsidiaries failed properly to account for these illicit payments in their books and records.

The SEC statement said “Diageo lacked sufficient internal controls to detect and prevent the wrongful payments and improper accounting”.

The SEC statement concluded: “Without admitting or denying the findings, Diageo agreed to cease and desist from further violations and pay $11,306,081 in disgorgement, prejudgment interest of $2,067,739, and a financial penalty of $3 million. Diageo cooperated with the SEC’s investigation and implemented certain remedial measures, including the termination of employees involved in the misconduct and significant enhancements to its FCPA compliance program.”

FCPA stands for Foreign Corrupt Practices Act.

A statement from Diageo said:

“Diageo has today agreed settlement of the previously disclosed US Securities and Exchange Commission (SEC) investigation into potential violations of the US Foreign Corrupt Practices Act.

The investigation related to payments involving Diageo’s subsidiaries in India, South Korea and Thailand. Under the settlement Diageo has agreed to pay $13,373,820 to the SEC in disgorgement of profits and pre-judgment interest, to pay a $3 million penalty to the SEC, and to cease and desist from committing any further violations of the books and records and internal controls provisions of the FCPA.

Diageo takes the SEC’s findings seriously and regrets this matter. Systems and controls have been enhanced in an effort to prevent the future occurrence of such issues and to reinforce, everywhere the Company operates, a culture of compliance and commitment to the principles embodied in Diageo’s Code of Business Conduct."